Role in loan questioned

Court says Clarkson profited from loan guaranteed by federal government to Native-owned firm that went under

Secretary of State candidates Gavin Clarkson, a Republican, and Maggie Toulouse Oliver, a Democrat, take part in a League of Women Voters of Santa Fe County candidate forum last week at Santa Fe Community College. Clarkson was selected by the state Republicans' central committee after the first nominee dropped out of the race.

Gabriela Campos/The New Mexican

Posted
Tuesday, October 9, 2018 7:42 pm

For work on the loan for the Westrock purchase

I did not get paid a penny”

Gavin Clarkson

By Thom Cole tcole@sfnewmexican.com

Michael Jandreau, the chairman of the Lower Brule Sioux Tribe in South Dakota, traveled to lower Manhattan in New York City in September 2009.

The occasion: an announcement at the National Museum of the American Indian that the Lower Brule Sioux had purchased Westrock Group, a Wall Street financial services company, creating what was billed as the first wholly American Indian-owned brokerage in U.S. history.

Jandreau also announced Westrock would create a subsidiary to provide investment services to tribes around the country.

"This is a landmark event for our tribe and for all American Indians," the tribal chairman said.

But Westrock and its subsidiaries went bankrupt in three years, and a Lower Brule Sioux company defaulted on a federally guaranteed, $22.5 million loan to finance the purchase of Westrock and inject money into the company.

Still, some of those involved profited from the loan proceeds, including the leadership of a second tribal company involved with the loan, according to rulings by a U.S. Interior Department board and a New York court.

One of the key players connected to the loan was Gavin Clarkson of Las Cruces, the Republican candidate for New Mexico secretary of state in the November election.

Clarkson, who bills himself as a national expert in tribal finance, helped the Lower Brule Sioux convince the U.S. Interior Department to guarantee the loan to fund the Westrock purchase.

He and a company he owned collected at least $327,500 in compensation, according to a New York court ruling in a case related to the loan.

In a recent interview, Clarkson disputed that court finding, saying neither he nor his company received any compensation for work on the Westrock loan. He said he was paid consulting fees for other work for the Lower Brule Sioux.

He blamed the demise of Westrock on an unfavorable ruling from the Internal Revenue Service concerning tax treatment of returns on private investment in the company.

"I did not get paid a penny" for work on the loan for the Westrock purchase, Clarkson said.

The state Republican Party's Central Committee in July selected Clarkson to replace the GOP's nominee for secretary of state, who had dropped out of the race against incumbent Democrat Maggie Toulouse Oliver and Libertarian Ginger Grider. Clarkson unsuccessfully ran for Congress in the June primary election.

His congressional run followed a short stint with the Trump administration.

Clarkson, then a business professor at New Mexico State University, was selected in July 2017 for a top job in the Interior Department's Bureau of Indian Affairs. As part of his role with the Interior Department, he oversaw the program that had guaranteed the loan in 2010 for the Lower Brule Sioux to purchase Westrock.

Clarkson resigned the position in November, shortly after the nonprofit news organization ProPublica reported about the loan and his involvement. ProPublica reported an Interior Department official said Clarkson faced pressure to resign because he hadn't disclosed his role in the loan. Clarkson said he resigned to run for Congress.

After Clarkson left the Interior Department, the agency's Office of Inspector General conducted an investigation of alleged ethics violations by a senior official who no longer was with the department.

The report on the investigation didn't identify the senior official, but Clarkson told The New Mexican he believed the report was about him.

Clarkson was accused of encouraging subordinates to approve payment of the loan guarantee made by the Interior Department for the purchase of Westrock by the Lower Brule Sioux.

Clarkson denied the allegations, saying he couldn't order anyone to honor the loan guarantee because the department had already decided not to.

He said he may have expressed opinions on what impact the denial of the loan guarantee would have on lender confidence.

The loan's saga

The Lower Brule Sioux Tribe Reservation is located in the Missouri River valley of central South Dakota. The tribe has about 3,400 members. About half of the residents of the community of Lower Brule live in poverty, according to the U.S. Census.

The story of the tribe's purchase of Westrock, the failure of the company and the default on the federally guaranteed loan to finance the purchase is a complicated saga involving several tribal corporations.

New York and Ohio court records, Interior Department documents and a report by the group Human Rights Watch provide much of the detail.

LBC, a corporation of the tribe, agreed in 2009 to purchase Westrock for $12.3 million. LBC Western Holdings, a subsidiary of LBC, would be the actual purchaser.

But LBC Western didn't have cash to buy the Westrock stock. So, it issued promissory notes to stockholders. The notes were to be paid off when LBC Western obtained a loan.

About that time, Clarkson, a member of the Choctaw tribe in Oklahoma, was named president and CEO of another newly created tribal corporation called the Lower Brule Community Development Enterprise.

In June 2010, as part of a program to spur economic development on Indian land across the country, the Interior Department agreed to guarantee 90 percent of a $22.5 million loan that the Lower Brule Community Development Enterprise said it would make to LBC Western to pay off the notes issued to purchase Westrock and to fund Westrock's business plan.

But within months of the department's approval of the loan guarantee, there were signs of trouble.

Under federal regulations, the loan from Lower Brule Community Development Enterprise to LBC Western was supposed to close in 90 days. It didn't, but the department extended the deadline.

The Financial Industry Regulatory Authority also advised the Interior Department that it had issued cease-and-desist letters to two Westrock subsidiaries for failing to demonstrate compliance with a rule requiring broker-dealers to maintain a certain level of net capital.

In response to concerns from the Interior Department, the Lower Brule Community Development Enterprise said shutting down Westrock Advisors, a Westrock Group subsidiary, had eliminated a cash drain and had actually improved the value of Westrock stock.

The Lower Brule Community Development Enterprise loan to LBC Western closed in October 2010, the tribe told the Interior Department. The development corporation told the department in November 2010 the loan would be funded in a matter of days.

But the Lower Brule Community Development Enterprise didn't actually loan $22.5 million to LBC Western in the traditional sense. The development corporation was able to raise only $3.5 million from private investors to fund the loan.

The Lower Brule Community Development Enterprise did give some cash to LBC Western, but most of the loantook the form of the development corporation assuming the debt of LBC Western for the purchase of Westrock.

To finance the assumption of that debt, the Lower Brule Community Development Enterprise issued its own notes to be paid off when it found a third party to buy the $22.5 million loan it had made to LBC Western.

And in April 2012, the Lower Brule Community Development Enterprise sold the guaranteed portion of the loan for about $20 million to the Great American Life Insurance Co. of Cincinnati.

Disputing the loan

Five months after Great American purchased the loan and provided the cash to the tribal development company, Westrock Group filed for bankruptcy. And in April 2013, LBC Western defaulted on payments of the loan principal and interest to Great American. The company then filed a claim with the Interior Department for the $20 million the department had guaranteed.

The department has refused to pay for several reasons. Among them:

• The department disputed the loan from Lower Brule Community Development Enterprise to LBC Western ever closed in the traditional sense or was funded. It also has found Great American didn't meet the standard of care required of lenders when purchasing the loan from the Lower Brule Community Development Enterprise to LBC Western.

• The department said even if Lower Brule Community Development Enterprise was able to fund the loan, Great American failed to show the money was spent by LBC Western for the purchase and operation of Westrock.

In a ruling in May 2016, the Interior Board of Indian Appeals wrote that when the loan was sold to Great American, it appeared the money from the insurance company was used primarily by the Lower Brule Community Development Enterprise to purchase $12.8 million in notes the corporation had issued when it assumed the debt of LBC Western.

Some of those notes were held by members of the development corporation's board, which included tribal leaders. The Interior Department also said part of the $12.8 million was used to pay legal and consulting fees for Clarkson and a second tribal corporate representative.

In the related court case in New York, a judge found the Lower Brule Community Development Enterprise paid $327,500 in compensation in 2012 to Clarkson and his company, Native American Capital.

"The limited discovery undertaken thus far suggests that the main benefactors of LBCDE's operations since 2009 have been the company's executive management, legal counsel and the former note holders of Westrock," the judge wrote.

Clarkson, in the recent interview, said all of the $20 million that Great American paid to the Lower Brule Community Development Enterprise was used to pay off the notes that had been issued by the development company when it assumed the debt of the Westrock purchase.

He said he wasn't a holder of any of those notes.

"I had no ownership in LBCDE whatsoever," he said, adding he didn't believe any board members of the development corporation owned any of the notes.

He said Westrock failed when the IRS ruled that gains on private investment in the company would be treated as income and not as capital gains. That discouraged private investment, he said.

Clarkson blamed an IRS unit headed by Lois Lerner for the ruling. Lerner came under fire during the Obama administration for her treatment of tax-exempt organizations.

"But for Lois Lerner blowing this up, the loan would have been paid off, the tribe would be making a billion dollars and eradicating poverty in South Dakota," Clarkson said, adding Lerner may have retaliated against him because he accused her unit of being racially biased against tribes.

In a report last year, the Interior Department's Office of Inspector General said the department ignored multiple negative indicators that a loan for the Lower Brule Sioux to purchase Westrock might be too risky.

The Office of Inspector General found no criminal violations, and ProPublica reported a grand jury investigation didn't result in any indictments.

Loan timeline

March 2009: LBC, a corporation of the Lower Brule Sioux Tribe, agrees to purchase Westrock Group stock for $12.3 million in promissory notes to be paid off when its subsidiary, LBC Western Holdings, obtains a federally guaranteed loan.

September 2009: Lower Brule Sioux Tribe announces acquisition of Westrock Group, a New York financial services company, and its subsidiaries.

December 2009: Lower Brule Community Development Enterprise, a corporation of the tribe, submits an application to the U.S. Interior Department for a department guarantee of 90 percent of a $22.5 milÂ­lion loan it plans to make to LBC Western for the purchase of Westrock stock and to fund company operations.

The Interior Department approves the loan guarantee.

October 2010: The Financial Industry Regulatory Authority advises the Interior Department that it has issued cease-and-desist letters to two Westrock subsidiaries because the companies had failed to demonstrate compliance with rules requiring broker-dealers maintain a certain level of net capital. Also, a Westrock subsidiary, Westrock Advisors, has become defunct.

The Lower Brule Community Development Enterprise responds that shutting down Westrock Advisors had eliminated a cash drain and had actually improved the value of Westrock stock.

The loan from the Lower Brule Community Development Enterprise to LBC Western closes, according to the tribal companies.

November 2010: The Lower Brule Community Development Enterprise advises the Interior Department that the loan will be funded in a matter of days.

April 2012: Great American Life Insurance Co. pays the development corporation about $20 million for the federally guaranteed portion of the loan.

September 2012: Westrock Group files for bankruptcy.

April 2013: Great American declares LBC Western in default on payments of loan principal and interest.

June 2013: Great American files claim with Interior Department for the $20 million loan guarantee.

May 2016: The Interior Department Board of Indian Appeals upholds department decisions not to pay $20 million claim by Great American for failed loan sold to it by Lower Brule Community Development Enterprise. The board says there was no evidence a loan by the development corporation to LBC Western was ever made.